School is just around the corner! Some parents are chilling the champagne and some are stocking up on Kleenex in anticipation of sending their child off to university. Some parents may be worried that they should have contributed to an RESP and others are trying to understand how to take money out of an RESP and how much.
Should parents buy into an RESP ( Registered Education Savings Plan)?
YES. Contributing to an RESP is worth it especially since you get 20% in Grants from the government. With all the government cutbacks, this is a gift. What other investment gives you 20% right when you put money in and grows tax-free. Amazing right?!
Here are a few key points about RESP’s:
- Investments that are RESP-eligible allow savings to grow tax-free until your child enrols in a qualifying post-secondary education program.
- There are 2 types of RESPs: A Family Plan and an Individual Plan
- The Canadian Education Savings Grant (CESG) is a federal program that provides a matching Grant generally worth 20% of the first $2,500 of annual contributions or $500/year.
- You can withdraw your RESP contributions tax-free at any time for any purpose, but if you withdraw contributions at a time when your student is ineligible for an EAP (Education Assistance Payment), you will be required to repay the Grant (CESG) back to the government.
- Family and Individual plans generally allow siblings under 21 to share the contributions, CESG, and accumulated earnings without penalty. These sharing rules are quite complex.
So your kid is off to college or University – now how do I get access to the RESP?
- You can authorize Educational Assistance Payments (EAPs) from the RESP to the student beneficiary as soon as the student enrols in an eligible full- or part-time post-secondary education program.
- You will just need to provide a letter from the school as proof of enrollment.
- EAPs are taxed to the student beneficiary and must be used to further the student’s post-secondary education – so because students generally make very little money the EAP are essentially tax-free ( pretty awesome! ).
- If they don’t use it, you won’t lose it. Everything but the Grant comes back to you in the event that your child or grandchild chooses not to pursue a secondary education. You get to keep your contributions and the growth that it’s earned.
Parent and grandparents, I highly recommend you take advantage of RESP’s for your children and grandchildren. Parents, chill the champers and stock up on the Kleenex – your baby’s moving up in the world! Congratulations!
If you have any questions about financial planning for your child’s education, please get in touch with us. We’re here to help you.